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Elasticity of demand (KINH tế VI mô SLIDE)
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ELASTICITIES OF SUPPLY AND
DEMAND
ELASTICITIES OF SUPPLY AND
DEMAND
● elasticity Percentage change in one variable resulting from
a 1-percent increase in another.
Price Elasticity of Demand
● price elasticity of demand Percentage change in quantity
demanded of a good resulting from a 1-percent increase in its
price.
(2.1)
ELASTICITIES OF SUPPLY AND
DEMAND
Point versus Arc Elasticities
● point elasticity of demand
the demand curve.
Price elasticity at a particular point on
Arc Elasticity of Demand
● arc elasticity of demand
prices.
Price elasticity calculated over a range of
(2.4)
ELASTICITIES OF SUPPLY AND
Linear Demand Curve
DEMAND
● linear demand curve Demand curve that is a straight line.
Figure 2.11
Linear Demand Curve
The price elasticity of demand
depends not only on the slope
of the demand curve but also
on the price and quantity.
The elasticity, therefore,
varies along the curve as
price and quantity change.
Slope is constant for this
linear demand curve.
Near the top, because price is
high and quantity is small, the
elasticity is large in
magnitude.
The elasticity becomes
smaller as we move down the
curve.
/E/ >1
Demand is elastic
1% change in P causes more
than 1% change in Q
/E/ <1
Demand is inelastic
1% change in P causes less
than 1% change in Q
/E/ =1
Demand is unitary
elastic
1% change in P causes 1%
change in Q
/E/ = 0
Demand is infinitely
inelastic
any change in P causes no
change in Q
/E/ = oo
Demand is infinitely
elastic
any change in P causes Q = 0
ELASTICITIES OF SUPPLY AND
Linear Demand Curve
DEMAND
Figure 2.12
(a) Infinitely Elastic Demand
(a) For a horizontal demand
curve, ΔQ/ΔP is infinite.
Because a tiny change in
price leads to an enormous
change in demand, the
elasticity of demand is infinite.
● infinitely elastic demand Principle that consumers will buy as much
of a good as they can get at a single price, but for any higher price the
quantity demanded drops to zero, while for any lower price the
quantity demanded increases without limit.
ELASTICITIES OF SUPPLY AND
Linear Demand Curve
DEMAND
Figure 2.12
(b) Completely Inelastic Demand
(b) For a vertical demand curve,
ΔQ/ΔP is zero. Because the
quantity demanded is the same
no matter what the price, the
elasticity of demand is zero.
● completely inelastic demand Principle that consumers will buy a
fixed quantity of a good regardless of its price.
Relation between E and Pricing policies
/E/ >1
P increases, TR decreases
P decreases, TR increases
/E/ <1
P increases, TR increases
P decreases, TR decreases
/E/ =1
P changes, TR stays the
same
/E/ = 0
?
/E/ = oo
?
ELASTICITIES OF SUPPLY AND
DEMAND
●
Other Demand Elasticities
income elasticity of demand Percentage change in the quantity
demanded resulting from a 1-percent increase in income.
(2.2)
● cross-price elasticity of demand Percentage change in the
quantity demanded of one good resulting from a 1-percent increase in
the price of another.
(2.3)
Elasticities of Supply
● price elasticity of supply Percentage change in quantity supplied
resulting from a 1-percent increase in price.
ELASTICITIES OF SUPPLY AND
DEMAND
During recent decades, changes in the wheat market
had major implications for both American farmers and
U.S. agricultural policy.
To understand what happened, let’s examine the behavior of
supply and demand beginning in 1981.
By setting the quantity supplied equal to the quantity
demanded, we can determine the market-clearing price of
wheat for 1981:
ELASTICITIES OF SUPPLY AND
DEMAND
Substituting into the supply curve equation, we get
We use the demand curve to find the price elasticity of demand:
Thus demand is inelastic.
We can likewise calculate the price elasticity of supply:
EPS =
P ∆QS 3.46
=
(240) = 0.32
Q ∆P 2630
Because these supply and demand curves are linear, the price
elasticities will vary as we move along the curves.
EFFECTS OF GOVERNMENT INTERVENTION—
PRICE CONTROLS
Figure 2.24
Effects of Price Controls
Without price controls, the
market clears at the
equilibrium price and quantity
P0 and Q0.
If price is regulated to be no
higher than Pmax, the quantity
supplied falls to Q1, the
quantity demanded increases
to Q2, and a shortage
develops.
Ceiling price (Pc)
• Is the legal maximum price that sellers can
set in the market (fees in school and
university, price of electricity).
• Is always lower than equilibrium price in
order to protect buyers.
• Causes excess demand in the market
(shortage).
• Solutions to excess demand?
Floor price (Pf)
• Is the legal minimum price that sellers can
set in the market (minimum wage).
• Is always higher than equilibrium price in
order to protect the sellers.
• Causes excess supply in the market
(surplus).
• Solutions for excess supply?
